Stock Name: LIONIND
Company Name: LION INDUSTRIES CORPORATION
Research House: OSK
Lion Industries Corporation Bhd
(April 13, RM1.74)
Maintain neutral at RM1.76 with target price RM1.57: Lion Industries' 73%-owned subsidiary Lion Forest Industries (LFI) announced to Bursa Malaysia that its wholly owned subsidiary Lion Rubber Industries Sdn BHd (LRI) has entered into a conditional share and receivable transfer agreement with Toyo Tire & Rubber Co Ltd for the proposed disposal of 75% equity interest in Shandong Silverstone LuHe Rubber & Tyre Co Ltd (Shandong Silverstone) for a cash consideration of US$21.6 million (RM65.9 million), subject to adjustments and a settlement of intercompany debts of US$24.4 million to LRI.
Simultaneously, LRI has entered into a joint-venture agreement as well as a put and call option agreement with Toyo Tire on the remaining 25% stake in Shandong Silverstone.
We are not surprised by management's decision to dispose of Shandong Silverstone, especially after its earlier decision to dispose of the profit-making tyre business in Malaysia, Silverstone Bhd, in October 2010. LRI's cost of investment in the 75% equity interest in Shandong Silverstone in December 2004 was US$30 million plus a cost of US$6.6 million to acquire the remaining 25% stake in this unit in January 2011.
Shandong Silverstone has been loss-making since its inception owing to the fierce competition in China's commercial tyre business. Therefore, we believe the initial disposal consideration, arrived at on the basis that the consolidated net asset value (NAV) of Shandong Silverstone of 142.67 million yuan (RM66.06 million), is fair.
Furthermore, Toyo Tire will settle intercompany debts due to LFI amounting to US$24.4 million, which will help to recoup this long outstanding amount.
As for the remaining 25% stake in Shandong Silverstone, LRI will be granted a put option by Toyo Tire to require Toyo to acquire the 25% balance over a duration of one year after a holding period of three years. However, Toyo Tire will also have the option to call on LRI to dispose of the 25% equity interest in Shandong Silverstone.
The settlement pricing will be based on the actual NAV on completion, plus 5% simple interest per year for the entire duration of the option period.
We welcome the latest development as: (i) the group has finally managed to hive off the loss-making unit; and (ii) the disposal also returns huge cash proceeds amounting to RM140.3 million. We are not overly excited, however, as we do not expect any cash to flow to the holding company or minority shareholders, taking the cue from the disappointing cash repayment of only approximately 13% from the net proceeds of Silverstone Bhd's disposal last year.
The proposals are also expected to result in a loss of about RM2 million. Furthermore, we remain cautious of the recent announcement of direct investments of 29% and 20% JV stakes in Lion Blast Furnace Sdn Bhd (LBF) by Lion Industries and its subsidiary LFI respectively, as this large-scale investment poses a high investment risk to the JV partners and Lion Group as a whole.
Therefore, we maintain our 'neutral' recommendation, with a fair value of RM1.57, derived from five times price-earnings ratio and 0.43 times price-to-net tangible assets ratio on CY11 figures. ' OSK Research, April 13
This article appeared in The Edge Financial Daily, April 14, 2011.
Company Name: LION INDUSTRIES CORPORATION
Research House: OSK
Lion Industries Corporation Bhd
(April 13, RM1.74)
Maintain neutral at RM1.76 with target price RM1.57: Lion Industries' 73%-owned subsidiary Lion Forest Industries (LFI) announced to Bursa Malaysia that its wholly owned subsidiary Lion Rubber Industries Sdn BHd (LRI) has entered into a conditional share and receivable transfer agreement with Toyo Tire & Rubber Co Ltd for the proposed disposal of 75% equity interest in Shandong Silverstone LuHe Rubber & Tyre Co Ltd (Shandong Silverstone) for a cash consideration of US$21.6 million (RM65.9 million), subject to adjustments and a settlement of intercompany debts of US$24.4 million to LRI.
Simultaneously, LRI has entered into a joint-venture agreement as well as a put and call option agreement with Toyo Tire on the remaining 25% stake in Shandong Silverstone.
We are not surprised by management's decision to dispose of Shandong Silverstone, especially after its earlier decision to dispose of the profit-making tyre business in Malaysia, Silverstone Bhd, in October 2010. LRI's cost of investment in the 75% equity interest in Shandong Silverstone in December 2004 was US$30 million plus a cost of US$6.6 million to acquire the remaining 25% stake in this unit in January 2011.
Shandong Silverstone has been loss-making since its inception owing to the fierce competition in China's commercial tyre business. Therefore, we believe the initial disposal consideration, arrived at on the basis that the consolidated net asset value (NAV) of Shandong Silverstone of 142.67 million yuan (RM66.06 million), is fair.
Furthermore, Toyo Tire will settle intercompany debts due to LFI amounting to US$24.4 million, which will help to recoup this long outstanding amount.
As for the remaining 25% stake in Shandong Silverstone, LRI will be granted a put option by Toyo Tire to require Toyo to acquire the 25% balance over a duration of one year after a holding period of three years. However, Toyo Tire will also have the option to call on LRI to dispose of the 25% equity interest in Shandong Silverstone.
The settlement pricing will be based on the actual NAV on completion, plus 5% simple interest per year for the entire duration of the option period.
We welcome the latest development as: (i) the group has finally managed to hive off the loss-making unit; and (ii) the disposal also returns huge cash proceeds amounting to RM140.3 million. We are not overly excited, however, as we do not expect any cash to flow to the holding company or minority shareholders, taking the cue from the disappointing cash repayment of only approximately 13% from the net proceeds of Silverstone Bhd's disposal last year.
The proposals are also expected to result in a loss of about RM2 million. Furthermore, we remain cautious of the recent announcement of direct investments of 29% and 20% JV stakes in Lion Blast Furnace Sdn Bhd (LBF) by Lion Industries and its subsidiary LFI respectively, as this large-scale investment poses a high investment risk to the JV partners and Lion Group as a whole.
Therefore, we maintain our 'neutral' recommendation, with a fair value of RM1.57, derived from five times price-earnings ratio and 0.43 times price-to-net tangible assets ratio on CY11 figures. ' OSK Research, April 13
This article appeared in The Edge Financial Daily, April 14, 2011.
No comments:
Post a Comment